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A crisis in equity dividend income

Every day we are seeing more and more companies announcing the removal, deferral or cancellation of dividends. Companies are under acute pressure to conserve cash in the current environment. Unfortunately, over the next few days and weeks, this trend will almost certainly continue and if anything, get worse.

Regrettably, we appreciate that this means many of our clients who are dependent on dividends may suffer an air-pocket in income over the first half of this year, and so it is critical that we explain what this means for you and what we are doing about it at Canaccord Genuity Wealth Management (CGWM).

By the close of business yesterday, around 15% of FTSE 350 constituents had already announced dividend cuts, which means that some £3bn of dividends have been cancelled. None of the top five income producers in the UK, who generate 34% of UK dividend income between them, have yet given an indication of their immediate plans, beyond highlighting the cost-cutting measures they are taking.

Even where companies have already adjusted their share price (going ‘ex-dividend[1]’), like Royal Bank of Scotland, Prudential and Schroders earlier this week, there is no guarantee their dividend distributions will actually be paid. In May 2010, BP rescinded its dividend between the ex-dividend date and the theoretical pay-date in the midst of the Macondo oil well disaster in the Gulf of Mexico, going against the understanding that investors who purchase stock before the ex-dividend date are entitled to the next dividend payment.

We could also see some companies paying their 2019 dividend but being constrained in paying distributions for the remainder of 2020, if we experience a deep recession as a result of the coronavirus – so the fall in income may persist into 2021.

Given the flight to liquidity, it is even the case that perfectly sound companies, with rock-solid balance sheets, are choosing to defer payments until later this year.

What does this mean?

It is very difficult for us to predict anything with any certainty at the moment. Given this headlong rush by companies into cash and liquidity, it’s certainly very difficult indeed to predict which companies may stop, or delay, paying out income; many may stop doing so even if they don’t necessarily need to.

In the UK, we would highlight these areas of bad news:

  • Oil companies made up around 20% of UK dividend income in 2019. Although they can probably maintain payments through 2020 if they wanted to, 2021 is a different matter if the price of crude oil remains at the current low levels in the teeth of the price war between Saudi Arabia and Russia.
  • 11% of UK dividend income last year came from special dividends (£12bn out of a total of £110.5bn of income). This source of income is very likely to disappear for the time being.
  • Banks have once again become big income generators.  Unfortunately, it is inevitable that bad debts will rise as a result of the coronavirus-induced lockdown. They are also under government pressure to provide assistance to smaller companies and individuals. At this time of crisis, sustaining these businesses and supporting the economic health of the nation comes before the distribution of capital to shareholders.
  • In the short term, we may see more dividends paid in shares. However, this is by no means the same as cash, and there may be tax implications for certain investors when they seek to turn their share dividends into cash by selling them.

All in all, in a worst-case scenario, we estimate that up to 50% of the UK’s dividend income could be at risk in the first half of 2020.

Even so, there are glimmers of potentially better news (although equally as difficult to predict):

  • The mining companies are also big dividend payers – and here at least, cash flows are likely to remain robust, as many of them supply commodities that are heavily used by China, which appears to be coming out of the COVID-19 crisis first.  
  • Although not to everyone’s taste, the tobacco companies are also big income providers although they can have their own individual issues and may not be immune to the pressure to reduce payments.
  • As we move to the other side of the crisis, companies that pay their dividends every quarter will be quicker to turn the income taps back on, perhaps as early as this summer.

We should also remember that it is possible that this will only impact the timing of payments. So long as things return closer to normal as we enter the summer and companies feel more confident in their going-concern status, many of these cuts may be reinstated. In this case, the income air pocket may only last for a few months.

What are we doing about it?

As we are acutely aware of the stresses these developments may place on some of our clients, we are closely looking at ways to mitigate the effects of this situation for our discretionary clients.

Our fund and equity teams are working hard to try to identify where the key areas of strain are likely to be, to allow your Investment Managers to realign your discretionary portfolios accordingly. 

We are also evaluating alternative ways to help discretionary clients reliant on an income from their portfolio, which may include investment in exchange traded funds (ETFs), which reduce the risk of being hit by specific company dividend cuts, along with other income-generating investment trusts and funds less exposed to the worst-hit areas of the market.

In these unprecedented and worrying times, please rest assured that we at CGWM are doing all we can in our power to moderate the negative consequences of this looming fall in income for our discretionary clients. There are measures we have already taken and will continue to take to this end.

Above all, we should remember that the economy will be resilient and will in time overcome the virus. And, just as happened after the big drop in income from shares after the global financial crisis 12 years ago, companies will bounce back and dividend flows will resume and grow once more.

If you are worried by the consequences of what we have discussed in this note, please take every opportunity to get in touch with your Investment Manager here. We are dedicated to helping you through these difficult and turbulent times.

You can also keep up to date with the steps we are taking on coronavirus, and our latest market updates here.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. This is not a recommendation to invest or disinvest in any of the sectors mentioned above.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.


[1] Ex-dividend describes a stock that is trading without the value of the next dividend payment. An investor who buys the stock on its ex-dividend date or later will not be eligible to receive the declared dividend.

 

Photo of Richard Champion

Richard Champion

Deputy Chief Investment Officer

Richard is Canaccord Genuity Wealth Management’s Deputy Chief Investment Officer, based in our London office. He is a member of the Asset Allocation and Portfolio Construction committees, as well as chairing the UK Stock Selection Committee. Richard joined Canaccord in June 2015. Prior to this he was Chief Investment Officer at Sanlam Private Wealth, and has extensive experience running Global, European and UK equity portfolios, as well as managing money for high net worth clients. He is an Associate of the Society of Investment Professionals.


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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

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